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The Best Blue Chip for 2007: eBay

Forget the earnings -- focus on the cash flow.

Few stocks are more loved by Fools than eBay(NASDAQ:EBAY), according to our Motley Fool CAPS community intelligence service:

Metric

eBay

Total ratings

1,005

Bullish ratings

881

Bull ratio

87.7%

Bearish ratings

124

Bear ratio

12.3%

Bullish pitches

259

Bearish pitches

30

Data current as of Nov. 7, 2006.

Show me the moneyIt's easy to understand why. eBay is one of the great cash generators in the e-commerce business. Over the trailing twelve months alone, eBay has managed to produce $1.63 billion in free cash flow. More than $3 billion in cash and short-term investments remain on the balance sheet.

Why mention all this? Because eBay has seen better days. As growth has slowed, the stock has paid a price, down 22% from a year ago. That's of course understandable. Slowing growth never sits well with the Street, especially when it comes on the heels of multi-billion-dollar acquisitions, as has been the case with eBay and its deal for Skype.

Nevertheless, I consider eBay's issues to be temporary setbacks that give investors an opportunity to buy a blue-chip dream stock that's so blue it's loaded with green. Let's run through its other advantages one by one.

Brrrrrrring!Network effects callingRecently, Skype inked a deal whereby customers of Broadcom's (NASDAQ:BRCM) Wi-Fi phones would get access to its software and service. Of course, that wasn't the real news as far as I was concerned. Check this out:

"Wi-Fi access is everywhere -- in homes, offices, campuses, coffee shops," said Manrique Brenes, Director of Hardware for Skype. "A Skype Wi-Fi phone gives people the freedom to connect to the 136 million family and friends already using Skype anywhere in the world." [Emphasis mine.]

Silly hype aside, that's some number. 136 million? Really? Really. And that's what makes the eBay business model so interesting. Skype, as well as PayPal, are incremental services that add to the core auction business that CEO Meg Whitman's team has developed. That platform had 212 million registered users as of the third quarter ended in October. Surely some of that group already uses Skype, but there seems to be plenty of synergy still to be gained; after all, eBay added 44 million registered users year over year.

eBay'sbest bidOf course, there's more to eBay than its global opportunity. Go back to its cash position. Because eBay generates more than $1.6 billion in cash annually, it can afford to buy back huge chunks of shares.

And it is. During the most recent quarter, eBay spent $667 million to repurchase 24 million shares, for an average price of $27.80 a stub. Today, the stock trades for $32.55, a 17% premium from the buyback price. That's value that shareholders can bank on.

When growth goes on sale, buyBest of all, eBay appears cheaply priced. Let's start with free cash flow, since that's where eBay's real strength lies. According to my math, the auctioneer generated $1.14 in free cash flow per share over the trailing 12 months. That's something to get excited about!

Get in the game!Like Google(NASDAQ:GOOG) and Amazon(NASDAQ:AMZN), eBay has never looked cheap. Except for now.

Disagree? Sign up for CAPS now and tell us what you think. Or, if you'd rather, choose one of the more than 1,300 stocks that have yet to earn a star rating in CAPS, including old-world financier Bank of New York(NYSE:BK) and marketer Harte Hanks(NYSE:HHS). Click here to rate either of them now. It's entirely free. Your Fool cap is waiting.

Both Amazon and eBay are Motley Fool Stock Advisor picks. Ask us for an all-access pass to the service and you'll get 30 days of free access to all of David and Tom Gardner's best picks, which collectively are beating the market by more than 42% as of this writing.

Fool contributor Tim Beyers has 32 picks in his CAPS portfolio, including Gateway(NYSE:GTW), which he still believes is an excellent short candidate. Think he's wrong? Get in the game and add your own rating.

Tim didn't own shares of any of the companies mentioned in this story at the time of publication. Get the skinny on all of Tim's stock holdings by checking his Fool profile. The Motley Fool's disclosure policy is bluer than the bluest blue chip.

Author

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment. Find him online at timbeyers.me or send email to tbeyers@foolcontractors.com. For more insights, follow Tim on Twitter.